Takata Corporation Business Report FY ended Mar. 2017

Financial Overview

-Sales were lower as a result of the Company’s selling off subsidiaries in the USA and Europe and the effect of negative currency translation

Operating income

38,958

42,133

(7.5)

-Income increased in Europe, Japan, and Asia, while it fell in the Americas

Ordinary income

42,999

35,206

22.1

-Income increased as result of favorable currency translation

Net income

(79,588)

(13,075)

-

-A net loss was recorded due to an extraordinary loss that resulted from plea bargaining with the United States Department of Justice

Sales by region

Japan

79,966

77,040

3.8

-Sales increased due to a recovery in new passenger-car sales and greater export volumes to Group companies

Americas

269,970

319,603

(15.5)

-Sales decreased due to Company’s some of its US subsidiaries sale and the effect of negative currency translation. This was in spite of the fact that new-vehicle production and sales were robust, and a recovery in Brazil occurred during the second half of the fiscal year

Europe

164,598

170,638

(3.5)

-Sales were lower due to the effect of negative currency translation, in spite of the fact that new-vehicle production volumes continue to be robust and sales on a local-currency basis actually increased year-over-year

Asia

147,997

150,720

(1.8)

-Sales were lower due to the effect of negative currency translation, in spite of the fact that new-vehicle production volumes continue to be robust in China and India especially, and sales on a local-currency basis actually increased year-over-year

Airbag Recall News

-The Company has made responding to the airbag recall and the market measures its most important and number one priority. In addition to cooperating with all of the OEMs in implementing the market measures, the Company is devoting its entire management resources toward manufacturing and delivering the necessary replacement inflators and airbags in carrying out the market measures.

-The Company jointly with Fraunhofer-Gesellschaft conducted an investigation to look into the causes; however, it was unable to reach a cause. According to analyses conducted up until now, when inflators are subjected to high-temperature/high humidity environments for long periods of time, and when this situation is compounded with other causes such as variances in precision because of production reasons, some inflators have the possibility developing unheard of levels of internal pressure and fail. Also, in inspecting and then producing the subject inflators originally as parts, the possibility of this happening over a long period of time was never known or noticed, since the inflators were within the allowable tolerances when tested and evaluated by OEMs.

-The Company is fully cooperating with the Consent Order that was agreed with the National Highway Traffic Safety Administration (NHTSA) and other remedies agreed under the demands set out by the relevant authorities.

-Honda Motor Co., Ltd. (Honda) announced in January that a passenger-side airbag has abnormally deployed and injured a person in a vehicle because of a traffic accident. The incident occurred because of abnormal activation of Takata Corporation made airbag inflator and resulted in the first Takata related injury in Japan. The vehicle was a 2003 Fit. Although the vehicle is covered by Honda's recall, the inflator had not been replaced. Honda will make efforts to prevent recurrence by increasing personnel for recall notification and calling customers' attention to recall information on its website. (From an article in the Nikkan Jidosha Shimbun on January 18, 2017)

-The Company announced that it has reached a settlement agreement with the U.S. Department of Justice (DOJ) regarding the Company’s previously disclosed issues related to the integrity of Takata’s inflator validation testing and reporting. The Company will pay a criminal fine of USD 25 million and establish a USD 125 million restitution fund for individuals who suffered or will suffer personal injury caused by the malfunction of a Takata airbag inflator, and who have not already resolved their claims. In addition, Takata will establish an USD 850 million restitution fund for the benefit of automakers who received falsified testing data and reports or who have purchased airbag inflators from Takata containing phase-stabilized ammonium nitrate. The Company has also agreed to enhance its corporate compliance program and appoint an independent monitor, who will report to the DOJ for a period of three years and monitor Takata’s compliance with its legal and ethical obligations. (From a press release on January 14, 2017)

-Honda Automobile (Thailand) on 6 December said it was recalling another 165,128 vehicles manufactured between 2007 and 2011 to replace front passenger air bag inflators made by Takata Corp. The latest announcement, extending the range of models, brings the total number of Honda vehicles recalled by the company in Thailand to about 865,000 units. The defective air bags supplied by Takata have been linked to at least 16 deaths, mostly in the US, and more than 150 injuries worldwide. For the new announcement issued on Tuesday, the models affected are:2009-2011 Honda City2009-2011 Honda Jazz2009-2011 Honda Freed2009-2011 Honda Civic2007-2011 Honda CR-V2008-2011 Honda Accord(From an article of Bangkok Post on December 6, 2016)

-The Company announced that it posted a JPY 7 billion extraordinary loss in its consolidated financial results for the period April-September 2016 to address lawsuits related to its airbag recalls. The Company also recorded a JPY 2.5 billion extraordinary loss as a settlement for certain defective airbags manufactured by its U.S. subsidiary. On the other hand, the company allocated JPY 11.2 billion from the sale of the stock of its U.S. affiliated company as extraordinary gains. As a result, the company achieved a profit increase for the period. The Company also announced a downward revision of its consolidated outlook for the fiscal year ending in March 2017. While the company reduced its projected net sales by JPY 50 billion to JPY 620 billion, it increased its projected operating profit by JPY 2 billion to JPY 35 billion, and net profit by JPY 7 billion to JPY 20 billion. (From an article in the Nikkan Jidosha Shimbun on November 5, 2016)

-A number of automakers are recalling additional vehicles for Takata's defective airbag inflators, as more are now subject to recalls. Toyota and Honda reported additional recalls in early June. On June 30, Mazda, Mitsubishi Motors, Fuji Heavy Industries (the maker of Subaru vehicles), UD Trucks, and Mercedes-Benz Japan followed suit, leading to an additional 1.44 million vehicles being subject to recalls. These vehicles are equipped with Takata's inflators in either the driver or passenger-side airbags, or in both. Fatal accidents due to inflator ruptures have been reported overseas, and automakers are giving the highest priority to accident prevention. (From an article in the Nikkan Jidosha Shimbun on July 2, 2016)

-The independent specialist committee set up by Takata Corporation (Takata) announced that along with soliciting investors as a financial measure to deal with a series of airbag recalls, it will also appoint Lazard, Ltd., an asset management company in the U.S., as a financial advisor. The recalls will require a large amount of expenditures, and the committee decided to hire financial specialists to decide on investors quickly, and smooth negotiations between Takata and automakers on how to split expenses. (From an article in the Nikkan Jidosha Shimbun on May 27, 2016)

Business Reorganization Plan

-The Company announced in February that the external specialist committee it set up to develop a business restructuring plan has selected U.S.-based Key Safety Systems Inc. (Key Safety Systems) as a potential sponsor. Based on this selection, Takata will officially decide on its sponsor after consultations with automakers about matters including the restructuring plan. While Key Safety Systems intends to support Takata through legal liquidation procedures, Takata aims to go into voluntary liquidation. The future course of restructuring remains uncertain. Key Safety Systems is a medium size airbag maker, and came under the control of Ningbo Joyson Electronic Corp., a newly emergent parts supplier in China, in June 2016. Autoliv, Inc. (Autoliv), a Swedish airbag giant, was reported to have been a potential sponsor. The external committee seems to have selected Key Safety Systems because investment by Autoliv could violate antitrust laws. (From an article in the Nikkan Jidosha Shimbun on February 7, 2017)

-The Company announced that it has transferred its entire 100% stake in its U.S. consolidated subsidiary, Irvin Automotive Products Inc., to Irvin Acquisition LLC. Irvin Acquisition is a limited liability company established for the purpose of this acquisition. Vincent Johnson, the owner of the Michigan-based Piston Group, owns a majority stake in Irvin Acquisition. Irvin Automotive Products manufactures and sells automotive interior and trim parts. Sales for FY 2015 (ended March 2016) reached approximately USD 480 million. Through this transaction, Takata is expecting to post an approximately USD 98 million extraordinary gain in its financial report for the second quarter of FY 2016. (From a press release on September 29, 2016)

-Key Safety Systems, owned by Ningbo Joyson Electronic Corp., has received an invitation from Takata and is preparing a takeover bid, according to an unidentified source. The combined company would be the world's second largest airbag supplier behind Sweden's Autoliv Inc. Joyson bought Key Safety for USD 920 million after U.S. regulators fined Takata and ordered it to phase out ammonium nitrate as an inflator propellant. Key Safety is planning to increase inflator production by more than 30 million units to 100 million units by 2020 and is adding production lines at plants U.S., Chinese, Mexican and European plants. (from a Detroit News article on July 23, 2016)

-Ningbo Joyson Electronic has denied the report that it has an interest in acquiring Takata Corporation. The company is currently working on acquiring 100% of U.S.-based Key Safety Systems (KSS) shares. Ningbo Joyson Electronic says the company and KSS are performing market assessments in the fields of active safety and passive safety technologies, but there is no discussion about investing in Takata. (From an announcement by the company on June 6, 2016)

R&D Expenditure

(in million JPY)

FY ended Mar. 31, 2017

FY ended Mar. 31, 2016

FY ended Mar. 31, 2015

Japan

2,995

2,977

2,662

Americas

9,300

10,070

10,104

Europe

6,440

8,821

9,107

Asia

1,961

3,068

2,535

Corporate

(138)

(195)

(26)

Total

20,559

24,742

24,383

Percent of total sales (%)

3.1

3.4

3.8

R&D Structure

-The Company has three R&D centers, one in Japan (Shiga), one in the USA (Detroit), and one in Europe (Berlin). In addition, the Company is working to develop a global R&D framework, with the addition of an R&D center in China that will conduct R&D activities for emerging countries.

R&D Activities

-The Company is working to develop safety systems that integrate passive safety aspects designed to protect occupants during impacts so as to reduce injuries to the maximum extent possible, with active safety aspects designed to foresee dangers and prevent accidents from happening or at least reduce the level of impact.

-Studies and R&D activities based on approaches to collision types and system functions.

Systems to protect passengers during head-on collisions

Systems to protect passengers against lateral impacts and rollovers

Systems to protect pedestrians

Systems to protect motorcycle riders

Collision avoidance and driver-support systems

-Development of devices containing protection systems, such as inflators and electronics.

Product Development

-Development of occupant-sensing technology that is an absolute must to achieve autonomous driving.

Driver-monitoring system

Hands on wheel system

Steering wheel with built-in illumination

-The Company is preparing to launch production of advanced steering-wheel packages in the summer of 2017.